Companies that fail to comply with a creditor’s statutory demand for payment are subject to a presumption of insolvency, and may face the prospect of winding up proceedings and the appointment of a liquidator. But that isn’t always the end of the story.
In Deputy Commissioner of Taxation v Jackson Bell Pty Ltd [2023] FCA 916, Jackson Bell Pty Ltd (Company), successfully applied to terminate the winding up under s 482 of the Corporations Act 2001 (Cth) (Act).
Background
The Company was in the business real estate management, primarily the management and collection of rental income for 130 property owners, which earnt it a management fee. The Company consistently generated profits, and maintained a valuable management portfolio.
In 2022, the Company employed an external accountant, Mr Hammond, who noticed the Company’s bookkeeper had not lodged or prepared the monthly BAS for 23 months.
Mr Hammond prepared and lodged the BAS, resulting in a liability of $184,878 being owed to the Deputy Commissioner of Taxation (DCT).
In late May 2023, Mr Hammond received a statutory demand from the Australian Taxation Office (ATO). The Company subsequently entered into a payment plan with the DCT, and Mr Hammond was advised by the ATO that the DCT would take no further enforcement action against the Company.
However, the DCT had already filed an application to wind the Company up, and a liquidator was appointed on 12 July 2023.
When the Company’s sole director, secretary and shareholder, Mr Southwell, became aware of the appointment, he stated that had it been on notice of the winding up application, it would have opposed it on grounds of solvency. Mr Southwell made an application to terminate the winding up of the Company.
Considerations
Section 482(1) of the Act confers a discretionary power to the Court to terminate the winding up of a company with immediate effect.
The Court had regard to the factors identified in Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533 in exercising that discretion:
- The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay,
- There must be service of notice of the application for a stay on all creditors and contributories, and proof of this,
- The nature and extent of the creditors must be shown, and whether or not all debts have been discharged,
- The attitude of the creditors, contributories and the liquidator is a relevant consideration,
- The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding-up is sought,
- If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing of affairs, a full explanation of the reasons and circumstances should be given,
- The general background and circumstances which led to the winding-up order should be explained,
- The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to “commercial morality” or the “public interest”
Importantly, these principles were not intended to be exhaustive and the Court’s primary consideration should be the company’s solvency.
Held
The Court had regard to the following matters in concluding that the Company’s winding up should be terminated:
- Though there was a significant liability owed to the DCT of $374,573, Mr Southwell had provided a capital injection to the Company, held in his solicitor’s trust account, to enable the Company to meet that debt in full.
- Mr Southwell proffered an undertaking to the Court that the amount would be remitted to the DCT, meaning that the debts that formed the basis for the winding up would be paid.
- The ATO supported the application.
- The proposed orders provided for the liquidator to be paid for his work in administering the Company, and the liquidator did not oppose the application.
- The ATO was the only creditor to which outstanding liabilities were owed by the Company.
- The financial records and realistic forecasts of the Company’s business indicated that it was trading profitably.
- The events leading to the winding up and been satisfactorily explained, and steps to taken to ensure they do not take place in future, including by indicating that an external bookkeeper would be engaged moving forward.
- There was no ongoing breach by the company with respect to its tax liabilities.
- There were no other allegations of improper conduct or breach of statutory obligations in relation to the Company.
- There was no allegation that it would be in the public interest for the Company to be wound up.
- The application was brought by the Company’s sole shareholder (i.e. all members of the company were joined).
Key Takeaways
Although liquidation is typically a terminal process, it is important to bear in mind that in certain circumstances, it can be terminated. If a business might be solvent, maintains sound records, takes appropriate steps to reduce the risk of future contraventions and there was no misconduct or breach, a business may be able to terminate the winding up, enabling directors to regain control of the company.
Queries
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Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.